NEW YORK - John Hancock Financial Services Inc. said it will appeal a recent ruling awarding an estimated $65 million to a pension plan whose trustees alleged the Boston-based insurer breached fiduciary obligations under the Employee Retirement Income Security Act.
U.S. District Court Judge Denny Chin in New York ruled last month that John Hancock engaged in "repeated and substantial violations" of its fiduciary responsibilities under ERISA by using non-guaranteed assets in Unisys Corp.'s pension plan for its own benefit and without regard to the plan's rights.
In 1993, the U.S. Supreme Court ruled that insurers have a fiduciary responsibility for funds invested beyond those needed to pay benefits guaranteed by group annuity contracts. Congress, however, effectively reversed that decision with a provision in the Small Business Job Protection Act of 1996, which exempts insurers from ERISA standards in managing funds that are part of commingled general accounts.
That law, however, didn't address the John Hancock case, which stems from a 1983 suit by Harris Trust & Savings Bank, the original trustee of Sperry Corp.'s pension plan. Sperry became Unisys Corp. in 1986. The Bank of New York is the trustee of the Unisys Master Trust.
In 1941, Sperry bought a group annuity contract to fund a retirement plan for its employees from Hancock. Under the plan, any extra money the insurer generated through a higher interest rate was credited to the Sperry plan but was termed "free funds" and was part of Hancock's general investment account.
In participating group annuity contracts, insurers and plan sponsors share any gains or losses on invested premiums beyond what the insurer needs to pay out the guaranteed benefit to retirees. In 1977, 1979 and 1981, Sperry's pension plan withdrew $12 million in assets from the free funds to invest elsewhere, according to court papers. In 1982, Sperry asked again to withdraw money from the free funds but John Hancock refused, citing its own cash needs. Harris Trust sued, alleging the insurer breached its fiduciary responsibilities.
Last month, Mr. Chin ruled that the insurer had breached its obligations under ERISA regarding the "free funds." In making investment and allocation decisions, "Hancock repeatedly placed its own interests ahead of the interests of the plan and plan participants and beneficiaries," he wrote.
Court papers allege that as early as 1976, John Hancock routinely invested plan assets in its own home office properties and charged itself below-market-rate rent. Such actions lessened the investment return, which was allocated to its participating general account contracts, including the Unisys plan.
Mr. Chin awarded the pension plan $19.5 million plus interest for lost investment opportunity and for violation of pension rules against self-dealing, plus attorneys' fees. He also removed John Hancock as a trustee of the Unisys pension fund, allowing Unisys to withdraw from its annuity contract and invest the money elsewhere.
John B. Berringer, a partner in New York law firm Anderson Kill & Olick PC, which represented the plan, said the total cost of the judgment could exceed $65 million.
The insurer is appealing the decision "because we believe it is wrong in the way it applied the law and imposed damages," Wayne Budd, John Hancock executive vice president and general counsel, said.
